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First Niagara: In the cross hairs

A year ago last week, First Niagara Financial Group’s board removed John R. Koelmel as its president and chief executive officer.

While that tumultuous period is over, the Buffalo-based bank faces a new test, convincing investors it can get more out of the operations First Niagara gobbled up during Koelmel’s tenure. Its stock price has inched up during the past year, but trails the S&P 500.

Spearheading the bank’s push is Gary M. Crosby, who served as interim president and CEO before being getting the job on a permanent basis in December. Crosby’s low-key style contrasts sharply with Koelmel’s outgoing manner, a shift that seems to reflect the bank’s mantra of striving to improve results, rather than making more acquisitions.

“Being bigger is not a priority,” Crosby said in a recent conference call with analysts. “There is no next M&A deal.”

Crosby – who was added to the board of directors last year – also tamped down any notion that the bank was positioning itself as a takeover target, saying that First Niagara is committed to improving independently, rather than through being acquired by another bank.

First Niagara’s fortunes have come to mean a lot to the Western New York economy. Its headquarters is a driving force in the rise of the Larkinville district. The bank employs about 6,000 people in four states, including about 2,200 in Western New York. It provides the kind of financial services jobs that business recruiters want to generate more of, and is generous with donations. Remaining independent ensures First Niagara’s headquarters, jobs and decision-making remain local – vital to a region that has lost too many of those operations in the past.

First Niagara emerged on the national scene several years ago as an aggressive deal maker. A series of acquisitions propelled what used to be called Lockport Savings Bank to a top 25 U.S. bank as measured by market capitalization and assets. Its growth has given Buffalo another major hometown bank – along with M&T Bank Corp. – to call its own.

Now investors are eager for First Niagara to capitalize on the mergers, in the form of more-robust results. Crosby acknowledged as much during the January conference call: “Bottom line, First Niagara is solid at its core, but we’ve been underperforming and as a result under delivering for our shareholders.”

Market surprised

For much of the past year, the question hanging over the bank was, who will replace Koelmel on a permanent basis? After a nine-month national search, the board gave its answer: Crosby.

“I think initially people were looking for somebody from outside the organization to come in and take the reins, somebody who could maybe bring a different perspective or a fresh perspective to the bank, somebody who hadn’t worked there previously,” said Damon DelMonte, a bank analyst at Keefe Bruyette & Woods.

But the perception may have shifted since then, he said.

“I think people realize Gary has a strong background in the geography where First Niagara is based, has had success in his past endeavors, and I think people believe he could be ultimately be the one to positively move the bank forward,” DelMonte said.

Since Crosby was named CEO, the bank has trimmed some jobs, closed some branches and emphasized the role of “universal bankers,” versatile branch employees capable of handling more complex transactions.

But the most jarring news for the stock market came during a Jan. 24 conference call with analysts about the bank’s fourth-quarter results. Profits increased 27 percent from a year ago, and Crosby laid out his long-term vision for the bank. He said the bank would spend $200 million to $250 million over three to four years on technology and other initiatives designed to maximize profitability. The high cost and long time line surprised investors, and the bank’s share price dropped 12 percent in one day.

“It’s a sizable, sizable investment, and I think that investors were certainly taken aback than an investment of that size was necessary at First Niagara,” said Bob Ramsey, a bank analyst at FBR & Co.

Ramsey said First Niagara is “not entirely alone” among financial services firms when it comes to surprising Wall Street with the high cost of things like systems upgrades, he said.

“I suspect that the industry has underinvested for several years as they dealt with sort of more timely problems,” Ramsey said. And nowadays, he said, banks face much greater tech-related requirements, such as cybersecurity, complying with anti-money laundering and Bank Secrecy Act regulations, and have extensive requirements for reporting data.

DelMonte said while the technology upgrades sound good to customers who rely on the bank’s systems for their transactions, investors were picturing a drag on earnings.

“You are essentially reducing your earnings expectations for the next couple years, with the expectation of getting that back on the revenue side, and ultimately the increase in the bottom line in years three, four and five,” Ramsey said. “I don’t think many people were expecting that.”

The planned big investment prompted an analyst on the conference call to ask Crosby why First Niagara shareholders should wait so long to build out the infrastructure, when another, better-equipped bank could acquire First Niagara and add it to its platform.

Crosby turned that idea aside, and reiterated his point in follow-up questions from The Buffalo News.

“Our board and management team recognize the value of the franchise we have built and the significant opportunity that we have in front of us,” he said. “We believe that the best way to increase long-term shareholder value is by delivering on this strategy as a strong and independent company.”

A target?

Is First Niagara a target for takeover? Analysts DelMonte and Ramsey said they do not think so.

“Management’s focus is purely internal,” DelMonte said. “I don’t think that’s something that they’ve considered. It sounds like the board’s support of Gary’s plan and senior management’s plan is providing them a very long runway to implement this plan.”

“My understanding is the company and the board have been very committed to independence, and that a serious consideration of sale was never given a lot of thought,” Ramsey said. “I can’t verify that, but that’s sort of what seems to be the view.”

What’s more, Ramsey said, there are just not that many potential buyers capable of making such a deal.

“Your mega-banks are really too big and not looking to acquire,” he said. “First Niagara is a decent-sized institution in its own right. There are a lot of banks that cannot acquire a bank of that size or are not perhaps looking to do a merger of equals.” (First Niagara has about $37 billion in assets, and recorded net income of $295 million on revenues of $1.5 billion last year.)

Financial industry watchers have been struck by the lack of large-scale banking mergers over the past couple of years. Some point to the regulatory wringer M&T Bank has been put through amid its plan to acquire New Jersey-based Hudson City Bancorp. The $3.7 billion deal was announced in 2012, but the two banks have twice delayed a key deadline as M&T works to satisfy the Federal Reserve’s requirements.

Many mergers are driven by a bank’s specific needs, such as wishing to partner with a bank that has a stronger balance sheet, or teaming up with a larger bank to achieve better economies of scale, said Cristian Tiu, associate professor in the finance and managerial economics department at the University at Buffalo’s School of Management. Other banks may be focused on digesting what they have acquired and are not inclined to take on more, he said.

Stock concerns

As First Niagara aims to win over investors, it stock price is an ongoing source of attention.

A year ago, on the day Koelmel was removed, its shares closed at $8.44. On Thursday, it was trading at about $9.38 per share, an improvement of about 11 percent. As a comparison, over the same span M&T’s stock rose from $102.85 to $119.11 per share, a gain of about 16 percent.

First Niagara’s stock was climbing late last year. In October 2013, shares were up to $11.26. But they fell to as low as $8.22 in early February, in the days after the conference call that disclosed the technology upgrade. As of Thursday, First Niagara’s shares had not exceeded $10 since Jan. 23.

To put the current stock price in a longer perspective, First Niagara’s shares were trading above $15 per share back in February 2011, a level they have not seen since. The shares fell to as low as $7.20 per share in July 2012.

Local impact

While investors are focused on First Niagara’s results and earnings outlook, the region’s business community extols the bank’s stature and local impact.

Tom Kucharski, CEO of Buffalo Niagara Enterprise, which recruits companies, said First Niagara has multiple areas of local influence, including through financing projects, talking to prospective companies that visit, and its philanthropy. In 2013, First Niagara said it provided about $12 million in community grants and sponsorships in its territory, with much of it directed to the Buffalo area.

“You can’t really do all of that civic participation if you’re not demonstrating on the bottom line and have the kind of resources to be able to participate in that,” Kucharski said. “And I think they understand a healthy Buffalo and Niagara Falls and Western New York is good for their business, too.”

Dottie Gallagher-Cohen, the Partnership’s CEO, said the bank has been a “very active community partner.”

“Any time we get a headquartered company, it’s good for the region, and we have fewer of them than I would like here,” she said.

One example of the bank’s local support is the visitor’s center created at Buffalo Niagara International Airport, she said. “That would not have happened without First Niagara’s support.”

Gallagher-Cohen was pleased to see a local person, Crosby, chosen for the bank’s CEO job. “It reinforces the whole local nature of a company that has such a big footprint as a really an important asset.”

Crosby said he defines his mission this way: “As CEO, my job is to transform a great company into one of the best-performing regional banks in the nation, headquartered right here in Buffalo.”

Investors will be watching closely to see if he and his team can follow through on that ambition.